MCLE Article: Wake-Up Call

Construction defect statutes of repose should be interpreted broadly, despite the seeming restrictions of the statutory language

By Leslie Steven Marks and Nicholas A. Merkin

Leslie Steven Marks is a litigation partner with Wolf, Rifkin, Shapiro & Schulman, LLP, where he specializes in real estate and construction litigation. He also serves as an arbitrator for the American Arbitration Association. Nicholas A. Merkin is an associate in the litigation department of Wolf, Rifkin, where he focuses on business disputes and real estate litigation.

By reading this article and answering the accompanying test
questions, you can earn one MCLE credit. To apply for credit, please follow
the instructions on the test.

In recent years consumer demand for housing
in California has intensified and led to a marked increase in housing
construction. To meet this growing demand, and in an attempt to maximize
profits, many developers chose an assembly line form of home manufacturing,
even with the potential sacrifice in quality. As a result, much of California's
new housing inventory was defectively constructed, igniting myriad construction
defect lawsuits against developers and contractors.

Many of these cases have been resolved. Others will be brought in the
near future. Those contemplating future litigation, however, do not have
the luxury of unlimited time to initiate their claims. Construction defect
actions, as with virtually all civil litigation claims, must be brought
within a specific time period mandated by the California Legislature.1
Consequently, a viable cause of action for construction defects often
turns not only on the merits of the claim but also on whether the lawsuit
is brought within the statutory time limits. If a lawsuit is brought merely
one day late, the defendant developer will have an absolute defense to
the claim, and the plaintiff--even one with an otherwise factually and
legally strong case against the developer--may be left without a remedy.

Understanding the various time limitations for bringing construction
defect actions is crucial to plaintiffs and defendants. Unfortunately,
several aspects of these time limitations are confusing and require clarification
because of ambiguities contained in what is commonly known as the "control
exception."2

The California Legislature has imposed different statutes of repose
on construction defect cases depending on whether the defects in question
are considered "patent"--those that are apparent upon reasonable inspection3--or
"latent"--those that do not present themselves until after the completion
of construction.4 Code of Civil Procedure Section 337.1 applies to actions
for patent construction defects and limits such lawsuits to four years
after substantial completion of the construction. Code of Civil Procedure
Section 337.15, in contrast, provides for a 10-year statute of repose
from the time of substantial completion of construction for lawsuits arising
out of latent construction defects.

Both Sections 337.1 and 337.15, however, carve out identical exceptions
to their respective time limitations. Each is referred to as the control
exception. According to the exception, the time-related defense to liability
prescribed in the statutes cannot be asserted by "any person in actual
possession or the control, as owner, tenant or otherwise, of such an improvement,
at the time any deficiency in the improvement constitutes the proximate
cause for which it is proposed to bring an action."5 The control exception,
in other words, bars certain parties under certain conditions from using
the statutes of repose of Sections 337.1 and 337.15 as a defense in a
construction defect lawsuit.

Even a cursory reading of the control exception reveals the difficulties
in comprehending its scope and application. What exactly constitutes "actual
possession or the control"? Is control over certain aspects--but not all
aspects--of a development enough to fall under the control exception?
At what point does "possession or the control" have to be assumed by a
developer? What if an entity had "possession or the control" of a development
during construction but relinquished it after completion of the construction?

What persons or entities fall into the categories of "owner, tenant
or otherwise"? What about a governmental body, property management company,
or a condominium homeowners' association? Does being in "possession or
the control" toll the applicable time limitations on actions? If a contractor
builds and owns a development for more than 10 years before selling it,
does the applicable 10-year or 4-year time limitation begin to run at
the time of the plaintiff's purchase of the development or has the time
limitation already run?

Legislative Intent

One approach to answering these questions is to ask why the legislature
thought the control exception was necessary. It is important to discern
for whom the control exception was designed to benefit or protect.

In Eden v. Van Tyne,6 the court of appeal neatly summarizes the statutory
intent of Section 337.15 (and, by extension, Section 337.1) and describes
the legislative rationale for providing this type of defense to those
in the construction industry:

There is a reason for treating persons in possession differently from
the contractor and architect. In footnote 2 of the above case [Regents
of the University of California v. Hartford Accident and Indemnity Company],
the court states: "A contractor is in the business of constructing improvements
and must devote his capital to that end; the need to provide reserves
against an uncertain liability extending indefinitely into the future
could seriously impinge upon the conduct of his enterprise." On the
other hand, one who owns the property or controls it at the time of
the accident (i.e., at the time the defect constitutes the proximate
cause of the damage or injury) is likely to have insurance.7

According to the Eden court, indefinite prospective liability for construction
defects would make the construction business financially untenable. It
is for this reason that the legislature enacted the various time limitations
on actions against contractors and builders.

But why did the legislature also take away the protections of Section
337.1 and Section 337.15 from those in "possession or the control"? By
passing the control exception, the legislature limited the scope of the
Section 337.1 and Section 337.15 time limitation defenses. To this question,
Eden also provides an answer. Entities that are in "possession or the
control" of developed real property most probably have insurance. Consequently,
there is no need to protect these entities from indefinite prospective
liability, because this liability presumably will be borne by an insurance
company. Aggrieved property owners will be able to get their relief from
a member of the insurance industry, which apparently--at least in the
legislature's conception--is better suited to carry the costs of this
type of liability. From the Eden perspective, the statutory scheme might
even be viewed as favoring consumers by making sure that potential defendants
have deep enough pockets to pay a judgment entered against them. This
reasoning became an important guide for California courts considering
the proper application of Sections 337.1 and 337.15.

The time limitations on most tort claims run from the time the injury
in question is discovered by the potential plaintiff. Sections 337.15
and 337.1, however, operate differently in that their applicable time
limitations run from "substantial completion" of the construction rather
than from the time the injured party knew, or should have known, of the
injury. This difference distinguishes a statute of repose from the more
typical statute of limitation.

In Inco Development Corporation v. Superior Court, the court of appeal
further delineated the hallmarks of these two types of statutes setting
forth time periods within which an action can be brought:

Cal. Code Civ. Proc. §337.15 has characteristics of a statute of repose.
It is not dependent upon traditional concepts of accrual of a claim,
but is tied to an independent, objectively determined and verifiable
event, i.e., the date of substantial completion of the improvement.
That date may very well predate the time when a potential plaintiff
purchases the property. A suit to recover for a construction defect
generally is subject to limitations periods of three or four years,
depending on whether the theory is breach of warranty or tortious injury
to property. Unlike these statutes of limitation which begin to run
only when the defect was or should have reasonably been discovered,
the 10-year period in Cal. Code Civ. Proc. §337.15 imposes an absolute
requirement that a lawsuit to recover damages for latent defects be
brought within 10 years of substantial completion of the construction,
whether or not the defect was or even could have been discovered within
that period.8

Therefore, under California law, Section 337.15 is a statute of repose
rather than a statute of limitation. Consequently, the 10-year time limitation
is an absolute bar that is not dependent on when a latent construction
defect is discovered or when the property in question is sold by the developer.
Furthermore, it follows that the fact that a developer is in "possession
or the control" of a development does not toll Section 337.15 during the
time the developer possesses or controls the property.

Similar case law in connection with Section 337.1 provides that this
statute is also deemed a statute of repose rather than one of limitation.9
As such, the date of discovery of a patent construction defect is likewise
irrelevant to the operation of the statute. As with Section 337.15, the
fact that a developer is in "possession or the control" of a development
does not toll this provision during the time the developer possesses or
controls the property.

Interpreting the Control Exception

For the control exception to apply, the "possession" and "control" must
occur "at the time any deficiency in the improvement constitutes the proximate
cause for which it is proposed to bring an action." Reading this portion
of the statute certainly seems to indicate that if a party is in possession
or control when it caused the defect, it cannot plead the statute of repose
defense for construction defect actions. One can even imagine a valid
public policy basis for this interpretation: It will create a greater
incentive for developers to monitor builders and ensure that the work
they perform is free from defect. According to this approach, once a party
in possession or control--presumably the party with the best chance at
detecting and preventing a construction defect--allows a construction
defect to go unrepaired under its supervision, it is forever liable for
the consequences.

This interpretation of the control exception, however, defies logic.
Such an interpretation would eviscerate the statutes, as almost all parties
involved in the creation of a development can be said to have been at
one time in possession or control of the development.

This issue was at the heart of the court's decision in the Eden10 case.
The plaintiffs--purchasers of a residential property--filed a complaint
for rescission and damages against the sellers of the property and for
damages against the builder and a soils engineer. According to the plaintiffs,
the sellers had concealed the fact that a substantial section of a patio
wall had failed and toppled down a slope. After investigating the wall
failure, the plaintiffs discovered that the land was unstable, contrary
to representations made to them by the sellers, and that the residence
had suffered substantial structural distress requiring considerable reconstruction
of the property. The builder and the soils engineer moved for summary
judgment on the grounds that the causes of action against them were barred
by the 10-year statute of repose in Section 337.15.11

In response, the plaintiffs argued that Section 337.15(e) barred the
contractor--and named others--from using the statute of repose defense
because they were in possession or control of the premises at the time
the defective latent condition was designed, installed, or built into
the improvement. Under the plaintiffs' reading of Section 337.15(e), if
a party was ever in possession or control of an improvement, it could
never plead a Section 337.15 defense, no matter how much time had elapsed
between the discovery of the defect and the party's relinquishment of
possession or control.

The court of appeal, however, rejected the plaintiffs' argument, concluding
that such an interpretation "would defeat the intent of the statute."
All contractors, developers, and the like are in control of an improvement
at some stage of its development. Thus the plaintiffs' interpretation
of subdivision (e) would wholly deny the intent of the statute. Indeed,
the court found that the argument by the plaintiffs stretches the language
of the subdivision beyond the point at which it can be validly applied.12

Therefore, despite the language of the statute, the Eden court found
that in order to determine whether the control exception applies to a
certain party, it is not only relevant who was in control at the time
the defect was created but also who was in control at the time it was
discovered. Furthermore, although the Eden court never mentions this specifically,
it is reasonable for parties in possession or control at the time a lawsuit
is filed to be excepted from the time limitations defenses by the control
exception. This principle can be inferred from the Eden court's reasoning
because the party in possession or control is not only best situated to
identify a construction defect and remedy it before the filing of a lawsuit
but also most likely to cover up the defect. To put it even more starkly,
without the control exception a party in "possession or the control" of
a development that is aware of a major construction defect could simply
elect to withhold this information and run out the clock by failing to
relinquish control over the development until the statutory time limit
had expired.

The more recent case of Magnuson-Hoyt v. County of Contra Costa13 deals
with the question of what classes of parties may employ the statute of
repose defense. The plaintiff-property owner alleged that landslide damage
to her property in 1986 was caused by the manner in which an adjoining
public street was constructed in 1968. The complaint alleged that the
county substantially participated in the design and construction of the
street. The county had no responsibility for maintenance of the street
after June 1977, and the action was filed in August 1987. Thus the county
pled a defense based on Section 337.15.14

In an attempt to make use of Section 337.15's legislative rationale
in order to defeat its application in the lawsuit, the plaintiff offered
two arguments in response. First, the statute does not mention public
agencies but refers only to a "person" developing real property. Second,
the legislative rationale of the law was to protect "contractors and other
professionals and tradespeople in the construction industry," not government
entities.15

The court of appeal rejected the plaintiffs' contentions in full, finding
the language of the statute to be broad enough to encompass government
entities:

Section 337.15 clearly and unambiguously expresses a legislative intent
to put a 10-year limit on latent deficiency liability exposure for "any
person" performing certain activities in making improvements to real
property. Among the activities covered by the statute are performing
or furnishing the design or specifications of the improvement. There
is nothing in the words of the statute that suggests a public or governmental
entity which has engaged in one of the specified activities is precluded
from asserting the statute as a defense. Consequently, resort to the
legislative history of section 337.15 is unnecessary. We therefore hold
that the provisions of section 337.15 can apply to claims against governmental
and public entities.16

The Magnuson-Hoyt court never directly addressed the issue of why the
legislature would have sought to protect a party from outside the construction
industry that would not share a builder's burden to maintain large capital
reserves. Nevertheless, the court makes clear that the statutes of repose
regarding construction defects should be read broadly to shield "any person"
from liability who might otherwise be excluded from the defense if considering
solely the legislative purpose expressed by Eden--namely, the protection
of members of the building industry. Courts analyzing the appropriateness
of applying the control exception to a given situation must keep in mind
Magnuson-Hoyt's broad reading of the applicable statute of repose to include
nondeveloper parties--a result the legislature may never have intended.

Interestingly, in the spring of 1998, Assembly Bill 2631 (Baugh) was
proposed to limit the applicability of the Section 337.15(e) exclusion
to government entities. In accordance with this proposal, the possession/control
exclusion of subdivision (e) would be made applicable only to government
entities that had actual knowledge of the latent deficiency in question
and unreasonably failed to take action to cure it. Under this bill, a
government agency, even one in possession or control of an improvement,
could plead the 10-year statute of repose defense, except in situations
in which it knew of and unreasonably ignored a defect. Although the measure
ultimately failed to become law, it reveals some additional legislative
sympathy toward expanding the statutes of repose in Sections 337.1 and
337.15 beyond the construction industry, notwithstanding the original
intent of the legislature.

Assessing Control

In Gaggero v. County of San Diego,17 the court of appeal addressed the
issue of how much control gives rise to the Section 337.15(e) exception
to the statute of repose. The County of San Diego owned and operated a
landfill until it was sold in 1969. Subsidence later caused major damage
to nursery structures on the property, and the subsequent owners alleged
that the decomposition of material in the landfill had produced methane
gas, which in turn created void pockets in areas beneath the landfill
covering. In 2000, they brought an action against the County of San Diego
alleging negligence in the manner in which the landfill was planned, designed,
owned, occupied, and maintained. The county moved for summary judgment,
contending that the action was time-barred.

The plaintiffs countered, arguing that because the county installed
methane monitoring equipment on the landfill in 1988, the county was in
actual possession or control of the landfill within the meaning of the
exception to Section 337.15.18 The court disagreed with the plaintiffs
and held that they could not take advantage of the Section 337.15(e) exception.
In doing so, the court reiterated a policy principle:

First, the class of persons to whom builders may be liable is larger
than the class to which owners may be liable....Second, a builder may
be liable for construction defects under various legal theories--contract,
warranty, negligence, and perhaps strict liability in tort. Landowner
liability for such defects, on the other hand, typically lies only in
tort, unless the landowner is a lessor, in which case he is liable only
for events occurring while the tenant is in possession....Third, landowners
can ordinarily avoid liability by taking adequate care of their land
and structures….The builder has no such control over his product after
relinquishing it to the landowner.19

The court concluded by noting that "[t]he county's monitoring activity
did not bring it within the rationale of the exception. The monitoring
did not narrow the scope of potential claimants nor the theories upon
which the county might be held liable. Rather, quite to the contrary,
the monitoring arguably expanded the scope of the county's potential liability."20
In accordance with this reasoning, which paid special attention to the
legislative intent behind the statute of repose, the court found that
the county's mere monitoring of methane on the site did not constitute
enough "possession" or "control" to give rise to the subsection (e) exclusion.

The decision in Gaggero is narrowly written, addressing only the issue
of whether monitoring methane meets the requisite level of "possession
or the control" rather than the broader issue of the elements constituting
possession or control. Thus it is difficult to derive a broad lesson from
Gaggero. Clearly future courts faced with analyzing whether a party has
the minimal level of possession or control will have to consider at least
some precedent for the idea that, in some cases, mere supervision over
one aspect of a development by an entity is not enough to deem the entity
in control of the development for other matters.

In contrast to Gaggero, the court in Leaf v. City of San Mateo21 found
that responsibility for storm and sanitary sewer easements constituted
enough possession or control to permit the invocation of the control exception
and exclude the City of San Mateo from asserting a defense based on the
statute of repose. In Leaf, the owners of a duplex brought an action for
inverse condemnation against the city arising from subsidence damage alleged
to be the result of the city's defective sewage and drainage systems.
The plaintiffs filed the action against the city on January 28, 1977.
The trial court granted summary judgment in favor of the city on the ground
that the action was brought more than 10 years after the date of completion
of the duplex and thus fell under the ambit of Section 337.15. The court
of appeal reversed:

The purpose of the ten-year statute is to protect developers of real
estate against liability extending indefinitely into the future. [Citations
omitted.] Section 337.15 does not protect persons in actual possession
or control, as owner or otherwise, of the offending property at the
time of the proximate cause of the injury. [Citations omitted.] Defendant
City was in possession and control of the storm and sanitary sewer easements
on and near plaintiffs' property. Therefore, City of San Mateo was not
within the protected class, specifically developers, which was intended
by this statute.22

According to the Leaf decision, it was not even necessary for a party
to be in control of the damaged property. Mere possession or control over
the cause of the defect was enough to bar the protections of Section 337.15
and invoke the control exception.

Although Leaf is as narrowly drawn as Gaggero, a consideration of the
decisions in tandem suggests the proper parameters for addressing the
question of how much control is enough to qualify for the control exception.
In Gaggero, the defendant's supervisory responsibilities did not give
it the information necessary or the authority to identify or remedy the
construction defect that was the subject of the underlying litigation.
No matter how diligently the County of San Diego monitored the methane
at the site, it would not have discovered or been in a position to fix
the alleged soil subsidence problem. As a result, excepting the County
of San Diego from employing the statutory time limitations defense would
seem unfair.

Unlike the Gaggero court's analysis regarding the County of San Diego,
the Leaf court found that the responsibility of the defendant, the City
of San Mateo, was to maintain the city's sewage and drainage systems--the
very subject of the lawsuit. The city, therefore, was uniquely positioned
to have discovered the purportedly defective sewage and drainage systems
during the years leading up to the lawsuit and would have been best able
to remedy any defects. Thus the City of San Mateo should be barred from
using the applicable statute of repose as a complete defense to the action.

Although the case law and legislative history pertaining to Section
337.1 and Section 337.15 are scant, the information available allows for
the extraction of several principles that can guide the judiciary's interpretation
of these statutes. First, the applicable statutes of repose are designed
to avoid the indefinite prospective liability for construction defects
that would make the construction business financially untenable. The control
exception is designed to except entities that are in "possession or the
control" of a development from the protections of the statutory time limitations
because these types of entities most probably have insurance to provide
for their liabilities. Thus the statutory rationale should not apply to
them.

Second, despite the statutory language that the relevant period for
possession and control to determine the applicability of the control exception
is "at the time any deficiency in the improvement constitutes the proximate
cause for which it is proposed to bring an action," the proper question
is who is in possession or control at the time the suit is filed. Any
contrary interpretation would eviscerate the purpose of the statute, as
all developer parties were in possession or control at some point during
the construction. The party in possession or control at the time the defect
is discovered is best situated to identify a construction defect and remedy
it before the filing of a lawsuit--and is most likely to conceal the defect.

Third, the construction defect-related statutes of repose should be
read broadly to shield "any person" from liability, not just developer
parties--despite contrary rationales for the statutory language.

Fourth, a party that was well-positioned to discover and remedy a construction
defect as a result of its degree of control or supervision over a development
should be barred by the control exception from using the statutory time
limitations as a defense.

Last, when interpreting the control exception and the statutory time
limitations on construction defect actions, it is important to bear in
mind that Sections 337.1 and 337.15 are statutes of repose under California
law. As such, these statutes are not tolled during the period that a developer
is in possession or control of a development.